In a speech on Monday at AARP in Washington D.C., President Obama gave the go ahead to the DOL on the redrafting of the “fiduciary rule” that would subject brokers to higher investment advice standards. Later that day, the DOL sent its “conflicts of interest” proposal to the Office of Management and Budget (OMB) for review.
The DOL originally proposed a fiduciary rule in 2010, but it was withdrawn a year later under pressure from the financial services industry as well as some lawmakers. There are groups that still oppose the DOL proposal, stating the rule would force investors to change financial advisors, would limit investment choices, and also drive up costs. While some of these arguments may end up coming to fruition, the proposed rule is a positive for all investors.
Currently, investment advisors and brokers are subject to different standards of care. Investment advisors are subject to the fiduciary standard, which requires them to have a duty of loyalty and care, to place client interests first, and to avoid conflicts of interest. These advisors can only charge a fee for their services and do not accept commissions of any kind.
Brokers, on the other hand, are subject to the suitability standard, which requires them to make recommendations that are suitable for the client based on their objectives and needs. Brokers are not required to place client interests before their own. Brokers work for Broker-Dealers and can accept commissions for products they sell, such as front-loaded mutual funds and annuities (with the proper licenses).
While one may be able to differentiate between a broker that works for a Broker-Dealer and an investment advisor that works solely for a Registered Investment Advisor (RIA), there are other types of advisors that play both sides of the fiduciary line – dually-registered advisors and hybrid advisors. A dually-registered advisor has a license to sell a product (like a broker) but also has an advisory practice affiliated with a broker-dealer using that broker-dealer’s RIA.
Hybrid advisors are similar, but different in how they are registered. A hybrid advisor has his own RIA for advisory services, but also has a license to sell a product (like a broker) through a broker-dealer that is separate from the RIA. There are times when these types of advisors may be giving you advice and then also selling you a product. One can see how a client could have a difficult time trying to understand what type of advisor he or she is working when it comes to specific transactions.
In our opinion, when you pay for advice, your expectation is the person you hired is working in your best interest and putting you ahead of him or herself. The advisor community continually laments that they are not seen in the same light as an attorney or accountant. The way it is currently set up creates a cloud of confusion for those looking for an advisor. We believe a fiduciary standard is the first step in the right direction.